GLOVES OFF

No issue in recent decades has so galvanized states of differing views and agendas as the European Union’s Emissions Trading Scheme (EU ETS).

The heavyweights of international geopolitics—China, Russia, US and India lead virtually every state—except the EU states—in almost unanimous condemnation of the ETS and the stakes are getting higher with presidents and prime ministers of the world’s most powerful nations increasingly applying diplomatic pressure.

That top level pressure—so far mostly visible as asides at international conferences—will soon be replaced by legislative and economic weapons as trade wars are threatened.

Ironically while the stakes are high, the amount to be paid per passenger of about $5 for a transatlantic flight, according to the EU, is small by comparison. However that cost, which is still be being debated, is not the foremost of the issues. It’s the alleged violation of international law and sovereignty of states that truly raises heckles.

The EU ETS came into being in 2005 to combat climate change. Aviation was included in 2008, to take effect from Jan. 1, 2012.

In the US, Airlines for America (A4A), formerly the Air Transport Association of America, is leading the fight against the ETS with a legal challenge initiated in 2009.

Nancy N. Young, A4A vice president of environmental affairs, testified before the US House Aviation subcommittee that “international aviation is governed by treaty, customary international law and air-services agreements between countries.” Young explained that in addition to imposing requirements directly on international flights, these international and bilateral agreements set rules and limits on the types of regulations that individual countries can impose on the airlines of other countries.

“This makes sense. If one country or a set of countries could unilaterally impose any requirements they wanted on international flights, it would be very difficult—if not impossible—for flights from country to country to occur. Thus, the treaty, customary international law and air-services agreement rules are very important to ensuring freedom to travel and enabling international commerce,” Young said.

According to Young the EU ETS violates a series of treaties. When the Chicago Convention was agreed its intention was to establish “certain principles and arrangements in order that international civil aviation may be developed in a safe and orderly manner and that international air transport services may be established on the basis of equality of opportunity and operated soundly and economically.” 

Young argues that the “unilateral act of the EU is in breach of ICAO authority and the agreement of parties to the Chicago Convention to collaborate in securing the highest practicable degree of uniformity in regulations, standards, procedures and organization.” In addition, the EU unilateral scheme violates Article 2.2 of the Kyoto Protocol, to which the EU and its member states are parties, which expressly recognizes ICAO as the proper body through which countries may agree to a framework for further addressing greenhouse gas emissions from international aviation.

The EU ETS as it will apply to non-EU airlines also violates Articles 15 and 24 of the Chicago Convention related to taxes and charges as well as Article 11 of the bilateral air-services agreement between the US and the EU and its member states. For example, Article 15 prohibits the levying of “fees, dues or other charges” on international aircraft “solely of the right of transit over or entry into or exit from” the EU.

And by basing the levy on an airline’s fuel consumption, the EU ETS violates Article 24 of the Chicago Convention and Article 11(2) of the US-EU bilateral air services agreement, which prohibits countries from taxing fuel onboard an aircraft or uplifted for an international flight absent the express consent of the airline’s country of registry.

While the EU ETS violates international law in many respects, the most egregious is its regulatory overreach into other nations, Young said. On a flight from San Francisco to London, 29% of emissions would be over US airspace, including those on the ground at the airport, a further 37% in Canadian airspace, 25% over the high seas and less than 9% in EU airspace.

Article 84

As the year closed, many were calling for the use of Article 84 of the Chicago Convention to stop the EU ETS from being implemented.

Article 84 gives ICAO members the right to file a complaint against another IACO member for violation of “the cardinal principle of state sovereignty” outlined in the Chicago Convention.

According to sources, India is one of the ICAO states that is seriously considering using Article 84 against the EU and its member states. There have been similar complaints in the past, but all have been settled out of the court. However, if no settlement is reached, the case will go to the International Court of Justice in The Hague. At the Arab Air Carriers Organization annual meeting in Abu Dhabi in December, several airlines confirmed to ATWthat the possibility of using Article 84 to stop the EU ETS from being implemented had been raised at the ICAO council in November. At the same time, Association of European Airlines secretary general Ulrich Schulte-Strathaus conceded to ATWthat the risk of retaliation against EU carriers and an action through Article 84 were becoming a real concern.

In December, IATA director aviation environment Paul Steele warned that opposition from governments against the inclusion of aviation in the EU ETS was growing and could result in a trade war. Steele said that while IATA was still hoping and pushing for a global solution via ICAO through negotiations, the “level of opposition” was mounting.

“More than 20 states have indicated their dissatisfaction with Europe’s unilateral action. The danger of a trade war is still possible with Russia, China and India all raising the possibility, while a bill is making its ways through Congress to prevent US carriers from taking part,”  Steele said.

He added that the EU was in a difficult position. “There is demand from governments worldwide to change the EU ETS but it is not easy to change an existing regulation and all change options—intra-EU scheme, departing flights only, delay of the introduction—are problematic,” Steele said. “The only real way to solve this is for all governments to get back round the table at ICAO.” 

However, EU climate action commissioner Connie Hedegaard, speaking at UNFCC COP 17 United Nations Climate Conference in Durban, reiterated that the EU was steadfast in its decision to include aviation in ETS from January. “There is no way the EU will change legislation,” Hedegaard said.

India has been at the forefront in focusing international opposition to the EU ETS and organized the conference in New Delhi in September that led to the joint Delhi Declaration which was the basis for the ICAO working paper, which was adopted by 26 states—including China, Russia, India and the US—at the ICAO council Nov. 2 in Montreal and calls on the EU and its member states to exclude non-EU carriers from the EU ETS.

“It is disappointing that ICAO discussions once again focus on what states should not do instead of what they should do to curb growing aviation emissions,” Hedegaard said. But Indian Environment Minister Jayanthi Natarajan described the EU’s “unilateral” imposition of a “carbon tax” on aviation as a “disguised trade action taken in the name of the climate.” It is that perceived hypocrisy of none of the ETS revenue being used for environmental projects that also galls states.

EU justice?

Also inflammatory was the decision by EU Court of Justice (CJEU) advocate general Juliane Kokott to dismiss the challenge by A4A, American Airlines and United Continental Holdings on the legality of the EU legislation, suggesting that the EU itself was not bound by the Chicago Convention. While the preliminary opinion was not binding, the CJEU’s judges usually follow the decisions of an advocate general. Those judges were expected to come to a final ruling in late December.

Andrew Herdman, director general of the Association of Asia Pacific Airlines, said Kokott had failed to grasp what was in dispute. “Arguing the EU is not a party to the Chicago Convention and therefore not bound by its provisions, ignores the fact that all EU member states are parties to that Convention and this case was originally brought against the UK government, not the EU,” Herdman said.

According to the AEA’s Schulte-Strathaus, the EU ETS has moved from a day dream to a nightmare. “The issue should not be resolved in courts, and certainly not through trade wars, but in Montreal. We have developed a feasible sectoral global model; all it needs is political will,” Schulte-Strathaus said. “Hopefully, Europe will get the message that they need consensus on international solutions to international problems; otherwise, they will face yet another conflict which will negatively impact Europe’s efforts to recover economically.” IATA’s most recent outlook forecasts that European airlines could post a loss of up to $4.4 billion in 2012 if the eurozone crisis does not get resolved.

Putin prods

But the threat of a major trade war might get Europe thinking. Russian prime minister Vladimir Putin spoke to the ICAO Secretary General Raymond Benjamin on the sidelines of an aviation security conference in Moscow in October, expressing deep anger at the EU ETS, and reiterating that the Russian Federation and the US would use all means to oppose the implementation of the EU ETS. 

China has already moved in the trade war direction and in July blocked an order from Hainan Airlines’ subsidiary Hong Kong Airlines for 10 Airbus A380 aircraft which was due to be announced at the Paris Air Show. An industry insider confirmed to ATW that the Hong Kong-based carrier had to postpone the order because Beijing failed to give the airline a “green light,” in part to express its disapproval of Chinese carriers’ inclusion in the EU ETS.

In a statement released in May, the China Air Transport Assn. noted it would urge the Chinese government to “impose much tougher retaliation measures” against the EU over the ETS, which it said could “severely impact” the “friendly cooperative relations between Chinese and European carriers as well as European aircraft manufacturers.” The organization estimated that the ETS will cost Chinese carriers CNY800 million ($123.6 million) annually.

In June, Airbus and the European Airlines Assn. jointly wrote to the EU, warning it was “madness to risk retaliation” from China over the ETS. And China Eastern Airlines Board Secretary Luo Zhuping has expressed dissatisfaction with the EU ETS and citing the scheme, said the Shanghai-based carrier would prefer the domestically produced COMAC C919 over Airbus aircraft.

While the European Parliament delegation chairman to COP17 Jo Leinen warns that there is “no way the Parliament will change the law,” IATA’s Steele
placed hope: “January 1st 2012 is a bit of a dead deadline. It is the start of legislation, but airlines are not obliged to surrender emissions before April 2013. I expect a lot will happen between now and then.”